Small print gaffe after Labour took over Northern Rock costs £270million in compensation

Taxpayers were yesterday hit with a £270million bill for a blunder by Northern Rock that went on for more than four years.

Around 150,000 customers who have an unsecured personal loan with the state-owned bank – typically for less than £25,000 – will be compensated for the embarrassing administrative error.

They will be paid back every penny of interest and charges they have paid on their loans, getting an average of £1,800 each.

Payouts: Northern Rock customers could receive compensation after an error made in 2008

The mistake hinges on an obscure change to the Consumer Credit Act in October 2008. The law says customers must be sent a statement about their personal loan every year stating the original amount of money offered by the bank.

But Northern Rock Asset Management – the ‘bad’ bit of Northern Rock that remains in public ownership – failed to do this.

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As a result, it is being forced to return all the interest and charges its customers have paid on their loans over the past four years.

Northern Rock was nationalised in February 2008 after failing. In January 2010, it was split into Northern Rock plc, which has been sold to Virgin Money, and Northern Rock Asset Management.

After leaving the Commons today Chancellor George Osborne joined children to paint a money box at a Christmas party at Number 11 Downing Street

The Treasury insists that nearly £20billion of taxpayers’ money at stake in Northern Rock Asset Management will be ‘fully recovered’.

Matthew Sinclair, of the TaxPayers’ Alliance, said: ‘Taxpayers have already paid once to bail out Northern Rock. Mistakes like this ultimately make the bill for that bailout even more expensive.’

No customers have complained about the annual statements, described as ‘merely incomplete, not misleading’ by Richard Banks of UK Asset Resolution, the holding company for Northern Rock Asset Management.

Liberal Democrat peer Lord Oakeshott said: ‘This is a gross failure of management and control by the Treasury and UK Financial Investments [responsible for managing taxpayers’ investment in state-owned banks]. They have clearly been asleep at the wheel.’

Labour criticised the Chancellor for failing to reveal the problem until yesterday, saying the Treasury knew about it in October.

Last night a Treasury aide said it was an example of the ‘heavy price we are still paying’ for past mistakes in the banking system.